Vardia Insurance Group - The journey starts
I am sorry for the low activity on the blog, last week have been really rough at work and I promise it will be better in the future. Finally this week my journey to financial independence starts with my first invested money in an insurance company, exciting. Vardia Insurance Group is my first inwestment and it happened on the 16th Oktober 2014 to a price of 24.6 NOK (2.492 EUR). It have been a bumpy ride so far, down to 22.5 NOK directly after I bought it and now its up to 27.8 NOK. An massive development on 13%, but in matter of fact the ups and downs now doesn't matter for me the importance is where we are in 4-7 years.
This post will consist of my first analysis of Vardia Insurance Group and also the points that made me buy Vardia Insurance Group.
Vardia Insurance is a Norwegian insurance company which operates in three countries, Norway, Sweden and Denmark, headquartered in Oslo, Norway. The stock is trading on the Oslo Stock Exchange under the ticker OSE:VARDIA. Main products for Vardia are to insure causalty and property for private customers and small medium enterprises. Vardia distributes its products mainly through sales centers, which is spread around the countries they are operating in. At the moment Vardia has over 440 employees and has more than 100 000 customers. Fiscal year 2013 had the Vardia revenues on 720 million NOK and gross premium income on 520 million NOK, which was a 330% growth from the previous year. The company has never been showing profit and has until now been financed by issuing new shares. Vardia went public in the beginning of 2014 and that was the time they made their last and biggest new share issuing, which gave the company 175 million NOK. The management has communicated that this will probably be the last time investors has to put in money, because from Q4 2014 the cash-flow will be positive (This will also me make or break for my investment, not a month in Q4 with positive .
Customers, industry and route to market
Vardia customers are spread geographically with Norway on 49%, Sweden on 49% and Denmark on 2%. Denmark has just started and September 2014 was their first real fair month in terms of business, thats the reason why Denmark has such low percentage of the customers. These numbers also goes with the premium income with Norway and Sweden is shared equally and Denmark stands for a small portion.
How does the insurance market in general do in Sweden, Norway and Denmark?
I could start to say that the nordic insurance market are a profitable industry, which means that the industry as an whole has an combined ratio below 100%. Combined ratio in short, combined ratio are the amount of premium collected from the insurers minus the claims paid out to insurers. A combined ratio above 100% may nevertheless say that the company are loosing money because it could still remain profitable due the return on the assets (investments). At the moment the combined ratio for Sweden, Norway and Denmark are approximately on 90%, which is a really good number. During the 1990:s the combined ratios for the Nordic countries were much higher, Sweden for example had a number over 100% until 2003. As you probably understand is the Nordic insurance industry in a really good time, and I can't see anything that would change this during the next 3-5 years.
Market share, both Sweden and Norway has almost an oligopoly on their insurance market with four big players dominating the market. In Sweden the big players are, Länsförsäkringar,IF, Trygg Hansa and Folksam, these companies stand approximately for 80% of the market. In Norway the four biggest players has 75% of the market, IF, Gjensidige, Sparebank1 and Tryg. The difference between the Swedish and the Norwegian market are actually only one thing and thats the growth. Norway has at the moment an higher growth then Sweden (the Swedish market are very stable), approximately 6-8% annually, versus the Swedish on 3-4% (estimations on the biggest companies, couldn't find any data). The problem or opportunity to have an industry that is growing a lot is that you will have a lot of new companies enter the market, (could be both good and bad), and this is also what is happening on the Norwegian market, a lot of new small insurance companies are starting to enter the market.
In Denmark we have a different market, the four biggest companies are only having 60% of the market, Tryg, Topdanmark, Codan and Alm. Brand. The Danish insurance industry is having a growth on around 1-3% which should be seen as low, on average the danish market has an combined ratio are below 100%.
Which market that will be best for Vardia is hard to say, but I think Denmark should have the highest potential, because of all the small players. Always harder to break an "Oligopol" than a normal market.. On the other hand Sweden and Norway are the ones performing right now, so we will see what the future looks like.
Vardia customers are spread geographically with Norway on 49%, Sweden on 49% and Denmark on 2%. Denmark has just started and September 2014 was their first real fair month in terms of business, thats the reason why Denmark has such low percentage of the customers. These numbers also goes with the premium income with Norway and Sweden is shared equally and Denmark stands for a small portion.
How does the insurance market in general do in Sweden, Norway and Denmark?
I could start to say that the nordic insurance market are a profitable industry, which means that the industry as an whole has an combined ratio below 100%. Combined ratio in short, combined ratio are the amount of premium collected from the insurers minus the claims paid out to insurers. A combined ratio above 100% may nevertheless say that the company are loosing money because it could still remain profitable due the return on the assets (investments). At the moment the combined ratio for Sweden, Norway and Denmark are approximately on 90%, which is a really good number. During the 1990:s the combined ratios for the Nordic countries were much higher, Sweden for example had a number over 100% until 2003. As you probably understand is the Nordic insurance industry in a really good time, and I can't see anything that would change this during the next 3-5 years.
Market share, both Sweden and Norway has almost an oligopoly on their insurance market with four big players dominating the market. In Sweden the big players are, Länsförsäkringar,IF, Trygg Hansa and Folksam, these companies stand approximately for 80% of the market. In Norway the four biggest players has 75% of the market, IF, Gjensidige, Sparebank1 and Tryg. The difference between the Swedish and the Norwegian market are actually only one thing and thats the growth. Norway has at the moment an higher growth then Sweden (the Swedish market are very stable), approximately 6-8% annually, versus the Swedish on 3-4% (estimations on the biggest companies, couldn't find any data). The problem or opportunity to have an industry that is growing a lot is that you will have a lot of new companies enter the market, (could be both good and bad), and this is also what is happening on the Norwegian market, a lot of new small insurance companies are starting to enter the market.
In Denmark we have a different market, the four biggest companies are only having 60% of the market, Tryg, Topdanmark, Codan and Alm. Brand. The Danish insurance industry is having a growth on around 1-3% which should be seen as low, on average the danish market has an combined ratio are below 100%.
Which market that will be best for Vardia is hard to say, but I think Denmark should have the highest potential, because of all the small players. Always harder to break an "Oligopol" than a normal market.. On the other hand Sweden and Norway are the ones performing right now, so we will see what the future looks like.
Route to market
Vardias route to market is mostly direct to the private sector and SMB (small medium businesses) customers under the name Vardia, but they also have business through re-sellers and partners which sell Vardias insurance products under their own name (and re-selling).
A small part of the sales are over the internet, dont remember the number exactly but I read it some weeks ago and it was around 1-2%.
Management
Vardias management should be seen as strong, everyone has an great experience from the insurance industry and haven't been involved in any scandals (at least cant I find it). At the moment the management in Vardia owns 28% of the company, which should be seen as big stake and also the commitment from the management to the shareholders.
CEO Ivar S Williksen has over 25 years of experience from the industry and from different management positions at other companies, mostly from Gjensidige were he worked for 13 years. I am confident on the management part.
Numbers and forecasts
Now over to the most interesting part, the numbers. Will start with the sales,
Sales
Since Vardia still not are making any profit on the bottom line because of their aggressive expansion, for me as an investor one of the key metrics are the sales history and an estimation about how I think the sales will develop over the upcoming 7 years.
So how has the sales been the last 15 months? Very very good! Since July last year the sales has almost jumped up 3 times, which is insane for me. The best part of the story is that Denmark is not up and running yet, which I think has the same potential as Norway, which means we will still have an increase in sales for a long time ahead. I do not think Vardia will be able to keep up this sales growth although but I think we could expect annual growth of approximately 30-40%.
Lets play with the sales numbers in Excel for my investment horizon of 7 years. I assume and am confident that Denmark will be up and running for 100% within 11 months and that Sweden and Norway will be growing in a more moderate speed (20%, haha). With these conservative estimations I will use an sales growth annually for the upcoming 7 years on 30%. Let also assume this year ends at 1112 million NOK and by 2021 should the sales be around 7000 Million NOK, which could be seen below.
A small part of the sales are over the internet, dont remember the number exactly but I read it some weeks ago and it was around 1-2%.
Management
Vardias management should be seen as strong, everyone has an great experience from the insurance industry and haven't been involved in any scandals (at least cant I find it). At the moment the management in Vardia owns 28% of the company, which should be seen as big stake and also the commitment from the management to the shareholders.
CEO Ivar S Williksen has over 25 years of experience from the industry and from different management positions at other companies, mostly from Gjensidige were he worked for 13 years. I am confident on the management part.
Numbers and forecasts
Now over to the most interesting part, the numbers. Will start with the sales,
Sales
Since Vardia still not are making any profit on the bottom line because of their aggressive expansion, for me as an investor one of the key metrics are the sales history and an estimation about how I think the sales will develop over the upcoming 7 years.
So how has the sales been the last 15 months? Very very good! Since July last year the sales has almost jumped up 3 times, which is insane for me. The best part of the story is that Denmark is not up and running yet, which I think has the same potential as Norway, which means we will still have an increase in sales for a long time ahead. I do not think Vardia will be able to keep up this sales growth although but I think we could expect annual growth of approximately 30-40%.
Lets play with the sales numbers in Excel for my investment horizon of 7 years. I assume and am confident that Denmark will be up and running for 100% within 11 months and that Sweden and Norway will be growing in a more moderate speed (20%, haha). With these conservative estimations I will use an sales growth annually for the upcoming 7 years on 30%. Let also assume this year ends at 1112 million NOK and by 2021 should the sales be around 7000 Million NOK, which could be seen below.
But how much will turn up on the last row? If we take a conservative number and say that we will have a gross written premium percentage on 85% (GWP), which means GWP in total will be around 5930 million NOK 2021. Now is it pretty easy to estimate a value on the company with just apply the market valuations we have today in the nordic insurance industry. The valuation in the industry now is spread between 1.7 - 3.1 x GWP is equal to the enterprise value, if we apply this on Vardia for my estimation on the GWP for the year 2021 we will end up at a value between 10 081 - 18 384 million NOK. If we take the most conservative valuation 10 081 million NOK Vardia will have a share price on 312 NOK /share (number of shares: 32 241 988), this is an return on 1168% from my purchase price. I think this numbers really show the potential for Vardia in the upcoming years, even when I deduct my margin safety on 30%, which I have for high risk companies, Vardia is still heavily under priced. The only thing that actually could make me sell this company are that its not showing profit and positive cash flow before end of february 2015. Will be really interesting to follow this young insurance company. Below a box with key metrics from the valuation.
Take care and have a nice evening,
Eighth Wonder Investing
Disclaimer: EWI (Me) takes no responsibility for losses on shares based on the information on this blog. I am not a financial professional and should be treated just as a normal person without any knowledge. Any information from this website could be wrong or misspelled and should be treated as wrong. Neither is this site or author responsible for any losses based on information from this site, please do your own due-diligence and consult with a certified professional financial consultant before investing.
